Contemporary law has become grounded in the conviction that not only the outputs of innovation – artistic expressions, scientific methods, and technological advances – but also the inputs of innovation – skills, experience, know-how, professional relationships, creativity and entrepreneurial energies – are subject to control and propertization. In other words, we now face a reality of not only the expansion of intellectual property but also cognitive property. The new cognitive property has emerged under the radar, commodifying intellectual intangibles which have traditionally been kept outside of the scope of intellectual property law. Regulatory and contractual controls on human capital – post-employment restrictions including non-competition contracts, non-solicitation, non-poaching, and anti-dealing agreements; collusive do-not-hire talent cartels; pre-invention assignment agreements of patents, copyright, as well as non-patentable and non-copyrightable ideas; and non-disclosure agreements, expansion of trade secret laws, and economic espionage prosecution against former insiders – are among the fastest growing frontiers of market battles. This article introduces the growing field of human capital law, at the intersections of IP, contract and employment law, and antitrust law, and cautions against the devastating effects of the growing enclosure of cognitive capacities in contemporary markets.

Thursday, November 20, 2014

Hain has staved off class actions several times, but not
here: the court certified a class of purchasers of Avalon Organics and Jason
cosmetic products, based on allegations that they were labeled “organic” when
they weren’t, in violation of California’s Organic Products Act (COPA), the
UCL, the CLRA, and express warranty.Before 2011, the product lines contained less than 70% organic
ingredients, with few exceptions.In
2011, Hain changed the formulations and labels of substantially all the
products.Plaintiffs bought products
from the two lines, in the belief that they were completely/mostly made from
organic ingredients, and were willing to pay more for that feature.

Federal law governing foods requires that food labeled
“organic” or “made with organic” must be at least 70% organic.This doesn’t apply to cosmetics, but
plaintiffs alleged that the federal definition shaped consumer expectations for
all organic products, including cosmetics.Moreover, COPA requires that cosmetic products advertised, marketed,
sold, labeled, or represented as organic in California be made of at least 70%
organic ingredients; plaintiffs alleged that COPA was a “legislative
determination” that it is deceptive to represent as organic cosmetic products
that have insufficient organic content.

Jason’s tagline “Pure, Natural & Organic” and Avalon
Organics’s name and “pro-organic” pledge on their front labels allegedly misled
consumers, given that they didn’t comply with the 70% rule, whether measured by
weight or volume.For example, only the
9th out of 19 listed ingredients in Jason Face Wash was certified
organic, which can’t possibly be 70%.(Hain
argued that after the 2011 reformulation, Avalon Organics products contained
more than 70% organic ingredients; plaintiffs disagreed.The answer turned on whether one could count
water added to reconstitute dehydrated aloe powder as part of the percentage of
organic ingredients. If yes, then the products all had more than 70% organic
ingredients; if no, they didn’t.)

Hain challenged the class definitions as containing
non-actionable products and as non-ascertainable because based on
self-identification without receipts. The court found that the class definition
for Jason products tracked the temporal use of the “Pure, Natural, &
Organic” tagline, and properly excluded products that are USDA-certified as
organic. The Avalon Organics class was
similar; post-June 2011 purchasers were part of the class, but if water used to
rehydtrate aloe powder counts towards the 70% threshold, they’d lose on the
merits—something the court wasn’t going to resolve before certification.

As for ascertainability, the court rejected the Third
Circuit rule requiring receipts or external identification of class members as
gutting the Rule 23(b)(3) class action precisely where it’s most needed—where
individual harm is small but aggregate impact significant. While reliance on affidavits can be
problematic, the analysis must be case by case.Extreme variety in covered products might make memory and affidavits
unreliable, but here all but 8 of 362 products were the same with regard to the
organic claims and product formulations used as the basis for the claims; the 8
were Jason products that weren’t popular.Consumers could reasonably be expected to recall the word “organic,”
which was even part of the Avalon Organics name.Given the likelihood that consumers could
correctly recall their purchases, self-identification by affidavit was
acceptable for a small-ticket claim, especially since the alternative would be
lack of redress for false advertising.This conclusion was bolstered by the fact that “total damages” would be
proved and fixed at trial, because they were restitutionary. Hain’s profit “will
be measured without regard to any individual plaintiff; then, after the total
figure is set, individual claimants will divide the award.”

Numerosity, commonality, typicality, and adequacy were
satisfied.Because COPA, the UCL, and
the CLRA all use an objective reasonable consumer standard, once the claim was proved
material to that objective reasonable consumer, inferences of reliance and
causation would arise. Hain argued that both Avalon Organics and Jason products
bore “other label statements (such as ‘no parabens’ and ‘no animal testing’)
that surely influenced some consumers’ purchase decisions.”But that didn’t destroy typicality, given the
inference of reliance that would arise from material misrepresentations.One plaintiff bought from an online vendor
and paid less than wholesale; this didn’t make him atypical, only affected his
individual damages.Here, as distinct
from in cases where certification was denied for want of typicality, uniform
misrepresentations about one word on the products’ labels were at issue across
the entire class:

Whatever the precise formulations
and uses of Hain’s various products, and whatever additional reasons consumers
had for buying them, the plaintiffs’ claims against them are simple and
uniform: the products were presented as organic when, under COPA, they were
not. The plaintiffs’ claims, in other words, have nothing to do with the unique
characteristics of the various Hain products; they have to do only with what is
allegedly shared by all those products. The court thus thinks that the
plaintiffs’ core claims can be adequately proved, for example, by someone who
has bought shampoo for someone who has bought hand cream.

For similar reasons, the court found predominance. While,
accepting Hain’s characterizations, 6 of 184 Jason products had no organic
representation, and 2 had 70% organic content, that represented only a small
percentage of products that could be easily excluded and didn’t destroy
predominance.

Nor would materiality, reliance, and causation raise
individual issues under California law given the objective reasonable consumer
standard.This standard “reflects the
UCL’s focus on the defendant’s conduct, rather than the plaintiff’s damages, in
service of the statute’s larger purpose of protecting the general public
against unscrupulous business practices.”Moreover, even if other representations also motivated purchases, there
can be more than one material reason for purchase.“This is how consumers shop: they buy
products all the time for more than one reason.”In addition, plaintiffs adequately showed
that, if they proved their claims on the merits, they could show that an
“organic premium” existed and would’ve been paid by all consumers, regardless
of their reasons for purchase. Thus all would have suffered injury regardless
of purchase motive.

This brought the court to the issue of damages models.The plaintiffs offered the declaration of Dr.
Stephen Hamilton, chair of the Department of Economic s at California
Polytechnic State University, San Luis Obispo.He calculated Hain’s revenue/profit from sales of the products at
issues, and also calculated a price premium for the “organic” attribute, not
based on individualized information about class members.Hain challenged Hamilton’s models with
testimony from an economist, arguing that his methods wrongly defined
restitutions and flunked the Supreme Court’s requirements for damages models
set forth in Comcast.

Under circuit precedent, plaintiffs needed to present a
damages model that ties damages to their theory of liability. And, to comport
with due process, the court must “preserve” the defendant’s right “to raise any
individual defenses it might have at the damages phase.” The court concluded that plaintiffs adequately
showed that damages could be calculated on a classwide basis in a way adequately
tied to the plaintiffs’ liability theory.Hamilton used three different methods to separate out the “organic”
premium from other product features.The
fact that he hadn’t performed the calculations dictated by his models wasn’t
dispositive; in part this was apparently because discovery was ongoing.“The point for Rule 23 purposes is to
determine whether there is an acceptable class-wide approach, not to actually
calculate under that approach before liability is established.”Hain could offer any defenses to individual
claims in the damages phase.

The class action, naturally, was superior to no lawsuit,
which was the only realistic alternative.

Monday, November 17, 2014

There’s probably a good magazine article or two in this
story.William Koch, the “litigious younger brother”
of Charles and David, bought over 2600 bottles of rare French wine consigned by
Eric Greenberg to an auction house.He
subsequently determined that 24 were counterfeit, and sued Greenberg for fraud
(both affirmative misrepresentation and fraudulent concealment) and violations
of New York’s General Business Law.A
three-week jury trial resulted in a verdict for Koch on all his claims, awarding
compensatory damages of $355,811 (the purchase price for the 24 bottles) and an
additional $24,000 in statutory damages on one of Koch’s GBL claims ($1000 per
bottle, pursuant to §349’s authorization of treble damages up to $1000 per
violation). In addition, the jury awarded Koch $12 million in punitive damages.

The court reduced the compensatory damages award to $212,699
to take account of Koch’s prior settlement with the auction house Zachys.It also remitted the punitive damages award to
$711,622, denied Koch’s requests for attorneys’ fees and injunctive relief, and
granted him pre- and post-judgment interest.

The court denied Greenberg’s motions for judgment as a
matter of law and for a new trial. Of
interest to me, Greenberg argued that the statements at issue were
non-actionable statements of opinion, and that Zachys, not Greenberg, made the
relevant statements.Opinion: the jury
was properly instructed that statements of opinion are non-actionable unless
the opinion is not sincerely held.And
the jury was properly instructed that puffery is non-actionable.The jury is presumed to follow instructions,
and along with vague superlatives, “the record contains several additional
potential statements of fact, or potentially insincerely held opinions, that
the jury could have reasonably construed as actionable misstatements.

As for statements in the Zachys auction catalogue, fraudulent
misrepresentations don’t need to be made directly to the plaintiff as long as
the plaintiff is among the class of persons intended to rely on the statement.The jury could conclude that
misrepresentations made to Zachys were intended to be communicated to
purchasers like Koch and that the misrepresentations in the catalogue could
ultimately be traced to Greenberg as the “driving force.”The jury apparently rejected contrary
evidence, apportioning blame for Koch’s GBL claims at 100% for Greenberg and 0%
for Zachys with respect to the § 349 claim and at 75% for Greenberg and 25% for
Zachys with respect to the § 350 claim.

Likewise, the jury could properly have found fraudulent
concealment, on the theory that Greenberg possessed superior knowledge with
respect to material facts about the bottles and that therefore his silence or
omission could constitute fraud. Greenberg’s counsel repeatedly emphasized that
Koch had the opportunity to inspect the bottles at issue, and could have seen apparent
indicators of their counterfeit status. But the jury was free to reject that
argument.The record did indicate “surface-level
problems with the bottles of wine—aberrational labels or irregular cork
striations, for example,” but it also included numerous references to
information Greenberg knew but chose not to share.The jury could agree that no amount of
inspection would’ve revealed what Greenberg knew.It was properly instructed that buyers,
especially sophisticated ones, have a duty to protect themselves in business
transactions.But it was also properly
instructed that “a buyer is not required to conduct investigations to unearth
facts and defects that are present, but not obvious,” meaning that “a buyer is
not expected to discover that a house is infested with termites.”

Nor was Koch’s reliance unreasonable as a matter of law.There was an “as-is” clause in the auction
catalog, disclaiming the authenticity, provenance, and merchantability of the
wine. The jury was instructed that specific disclaimers ordinarily “preclude a
finding of justifiable reliance,” as required for a fraud claim. But not always: where the material facts upon
which a plaintiff relies are “peculiarly within the [defendant’s] knowledge,”
and not discoverable by the plaintiff through “the exercise of ordinary
intelligence,” such an “As–Is” clause will not act as a bar to a fraud claim. The jury was also properly instructed that in
determining whether Greenberg had “peculiar knowledge” it should consider the
buyer’s sophistication and the accessibility of the underlying information.

Greenberg argued that, even if it was difficult to inspect
over 2000 bottles of wine, that was a difficulty of Koch’s own making, and Koch’s
wealth and sophistication weighed against a finding of peculiar knowledge.But it was reasonable for the jury to
conclude that, in light of all the circumstances, and despite Koch’s
sophistication and his right to inspect the bottles, it was unreasonably
difficult or impossible for him to have discovered what Greenberg knew.Under the circumstances, Koch wasn’t
unreasonable as a matter of law to fail to recognize various indicia of
inauthenticity or hire an expert to spend 25 minutes per bottle on inspection at
the time of purchase.The jury could
therefore find fraud notwithstanding the presence of an explicit disclaimer.

As for the GBL claims, GBL § 349 claim requires that (1)
“the defendant has engaged in an act or practice that is deceptive or
misleading in a material way”; (2) the “plaintiff has been injured by reason
thereof”; and (3) the deceptive act or practice is “consumer oriented.” Consumer-oriented conduct has to be more than
a private contract dispute, but it need not involve repetition or a pattern as
long as it was aimed at the public at large. Given the large number of bottles Greenberg
consigned, other consumers at the auction could have been affected by the
alleged misconduct.The finding of
liability under §349 also survived.

The court then found that the exclusion of Greenberg’s
refund offers as evidence during the liability phase was proper, though it was
properly admitted when the jury was considering whether to award punitive
damages.Refunds as a remedy for
counterfeits might provide limited insight into wine industry practices, but
not necessarily into Greenberg’s state of mind at the time of the key events,
but their probative value was outweighed by the prejudicial effects of
portraying Koch as unreasonable and litigious in not accepting the money.

The court also upheld the award of punitive damages; the
jury heard sufficient evidence from which it could conclude that Greenberg
acted with wanton disregard for potential buyers’ rights, and that this auction
was not the first time Greenberg had sold counterfeit wine. However, the award
was reduced because of due process concerns.

The reprehensibility of the conduct at issue was the most important
factor: the harm was economic as opposed to physical or potentially physical
(these bottles were collector’s items, not for drinking), and the targets—Koch and
other potential buyers—were not financially vulnerable, and the subject wasn’t
a core asset like a home or business.“Greenberg
deceived a wealthy collector whose hobby involves expenditures that most people
will never contemplate.”Some punitive
award was nonetheless appropriate, given that “[t]o deceive for one’s personal,
pecuniary gain and exploit one’s superior knowledge—the gravamen of the fraud
here—reflects reprehensibility that warrants some sanction.” The jury evidently rejected Greenberg’s
argument that his refund offer proved his good faith.

The high ratio of the jury’s award to its compensatory award
(33x the initial amount, and 56x the reduced amount) signalled a constitutional
problem.Given the economic nature of
the fraud, its lack of relation to liberty or dignity, and its lack of
disruption of Koch’s life, this wasn’t a case that justified going up to the
limits of the Due Process Clause.A
six-figure compensatory award was already significant in the absolute sense,
but less so in the relative sense, “particularly in the context of high-end
wine auctions where a single bottle may sell for $20,000, and in light of the
wealth of the inevitable participants in such auctions, including Greenberg.”Thus, a punitive award less than the
compensatory award wouldn’t likely have much deterrent effect.Thus, the court remitted the award to $711,622,
twice the initial compensatory damages award.The court didn’t use the setoff from the Zachys settlement in its
calculation, given that the jury awarded punitive damages on the fraud claim—a
claim brought only against Greenberg when Zachys settled—and given that the jury
allocated 100% liability to Greenberg (and 0% to Zachys) on the GBL § 349
claim.

Attorneys’ fees: Koch sought nearly $7.9 million in
attorneys’ fees.The GBL allows an award
of reasonable fees to a prevailing plaintiff, at the trial court’s discretion.The court declined to do so, for several
reasons.The fees “bore no relationship
to the amount of actual damages at issue,” given the aggressive “battle royale”
fought by the parties for six years, for a compensatory damage award of only $355,811.
In addition, the compensatory damages
for Koch’s commercial injury did capture the extent of his success at trial, as
opposed to other situations in which intangible rights are vindicated.

Also, the purposes of the GBL didn’t support an award of
fees; the potential for punitive damages on the fraud claim was the only reason
the case wasn’t mooted by Greenberg’s refund offers, but only the GBL claims provided
a basis for fee-shifting.This wasn’t a
case within the heartland of GBL fee-shifting, because it didn’t involve
vulnerable or disadvantaged consumers, and it didn’t involve conduct with a
broad impact on consumers in general, even though Greenberg’s conduct was
consumer-oriented.

Plus, Koch did refuse a full refund and insist on trial, “in
the hopes of sending a message and exposing what he perceived as Greenberg’s
wrongdoing.”He did so, and the court
accepted that Koch felt strongly about the matter, but this was really “a
litigation of choice and of principle, rather than of necessity or monetary
recompense.”Though neither Koch’s
wealth nor his sophistication barred an award of fees, it was still relevant
that Koch could’ve gotten his compensation years earlier but chose to spare no
expense in litigation.

Koch also requested broad injunctive relief against
Greenberg, barring him from (among other things) engaging in deceptive acts or
practices in selling wine. The GBL
allows private parties to obtain injunctive relief, but it wasn’t clear whether
eBay applied.The case law suggested that, while government
entities didn’t need to meet the traditional equitable requirements in seeking
injunctions, private plaintiffs did. Just because the New York statute
specifically authorized injunctive relief didn’t mean eBay’s equitable principles were displaced; so too does the Lanham
Act. The alternative would be absurd: automatic injunctive relief for any
prevailing plaintiff, no matter how small the violation.Given the absence of specific statutory
conditions for injunctive relief, the court applied the ordinary rules.

Koch didn’t suffer irreparable injury; money fully
compensated him.Though Koch argued that
Greenberg consigned more than the 24 counterfeits proven at trial, that was
beyond the scope of the trial and not the proper subject of a permanent
injunction.Compensatory and punitive
damages were adequate to make Koch whole.

As to the balance of hardships, Koch requested extensive and
damaging mandatory disclosures not required of other consigners in the wine
industry.“Koch has made efforts to
change the auction practices in the industry that permit this type of deceit to
occur. However, it does not follow from the jury’s finding that Greenberg
engaged in GBL violations that he must now be the symbol for changed norms
within the wine industry.” An injunction wouldn’t serve the overall public
interest.Rather, “this costly
litigation, intense public scrutiny, and a punitive damages award are
sufficient to dissuade Greenberg from engaging in deceptive acts or practices
in the future.”

Wednesday, November 12, 2014

Heartland and Mercury compete to provide electronic payment
processing to small and medium-sized merchants through point of sale (POS)
systems, which allow merchants to accept credit cards and debit cards. POS
systems, allow banks and credit card companies to receive their fees, merchants
to receive the proceeds from sales, and consumers to have their accounts charged.
Both companies use an “interchange-plus pricing model”: banks and credit card
brands charge a fee, typically as a percentage of the transaction plus a
per-transaction fee. POS systems providers then charge an additional fee to the
merchants as their price.POS systems
providers can’t control the interchange fee, but do control the plus fee, which
is “usually in some combination of basis points and cents-per-transaction.” Both plus and interchange fees can be reset as
often as twice per year.

Heartland alleged that Mercury took advantage of the
interchange fee adjustment to increase its fees and deceptively blame increases
on the credit card brands.Mercury
allegedly falsely told merchants that it would pass on the interchange fees at
cost, with no markup.Heartland alleged
that the deceptions worked through Mercury’s merchant application; the
representations of third-party POS dealers who sell Mercury’s product; its
website; and “other advertising and promotional materials distributed to
merchants and potential merchants.” Moreover, Heartland alleged that Mercury’s Operating
Guide contained deceptive language that misrepresents how Mercury bills its
merchants. In its review of nearly 300
of Mercury’s monthly billing statements, Heartland alleged, it found that in
75% Mercury actually charged a fee higher than disclosed.Heartland alleged that merchants didn’t know
the actual network fees and couldn’t easily determine them based on Mercury’s
statements.Further, Heartland
identified thirty merchants who switched from Heartland to Mercury, and
believed that its bid was deceptively undercut.The resulting statement allegedly showed Mercury’s bid-upon amount as
the “plus” fee, but also “falsely inflated network charges to impose an
additional four cent fee per card transaction.”

Heartland sued for false advertising under the Lanham Act
and state law, and related business torts. The court first determined that Rule
9(b) applied to all claims, because Heartland alleged “a unified course of
fraudulent conduct” as the basis of its claims, and sought punitive damages
based on Mercury’s allegedly intentional and willful conduct.

Mercury argued that it wasn’t engaged in “advertising and
promotion.”First, Mercury argued that
its monthly statements weren’t ads, because they “memorialize transactions that
have already occurred”; that the Merchant Application was a contract, and not promotional;
and that the Operating Guide, despite being on its website, is a mere
“technical manual.” (It seems to me that monthly statements
don’t have to be ads; it’s the alleged misrepresentations that got merchants to
engage in the transaction that are the core problem, and the statements then allegedly
prevent the merchants from realizing the prior deception.)

The court found that, with respect to alleged oral
statements, Heartland failed to plead with the requisite particularity.Heartland didn’t disclose the name of the
merchant it allegedly identified as a victim, or any other merchant.It also didn’t allege facts to support the
idea that a Mercury employee or representative made false statements, or
engaged in commercial speech.However,
Heartland had no way to know exactly which employee drafted the written ads, so
to the extent the complaint relied on written documents, Heartland didn’t need
to identify exactly who wrote them and when.

The court did find that the monthly statements “could induce
merchants to continue using Mercury’s services, and hence could be considered
commercial speech designed to propose a continued business relationship.” Similarly,
the Operating Guide “could be seen to propose a commercial transaction by
providing information to a potential merchant who may be considering using
Mercury’s services.” And the Merchant Application could be viewed as proposing
a commercial transaction—not a contract, but an offer to enter into a contract.
Thus, the complaint adequately alleged Mercury’s commercial speech.

The complaint still failed because Heartland didn’t allege
sufficient facts to show that Mercury disclosed its pricing as Heartland
alleged, or that Mercury charged something different from what it
disclosed.It needed to identify
specific language to show that there wasn’t sufficient disclosure of pricing
and fees.

For basically the same reasons, the UCL, FAL, and intentional
interference with contract/prospective economic advantage claims were
dismissed, with leave to amend.

Monday, November 10, 2014

The 9th Circuit held that a CAFA-compliant
settlement precluded the People of the State of California, acting through
their representatives (here San Diego’s City Attorney), from seeking
restitution for IntelliGender’s allegedly false advertising, but did not
preclude other remedies. The district court approved a settlement for a
nationwide class of buyers of the IntelliGender Prediction Test, touted as an
accurate predictor of a fetus’s gender using the mother’s urine sample. The State sought civil penalties, injunctive
relief, and restitution, and IntelliGender sought to enjoin its action.Because the State’s action was “designed to
vindicate broader governmental interests than the class action,” the whole
thing couldn’t be enjoined.But because
CAFA provides that the defendant has to provide notice to relevant state
officials of any settlement, to allow them to object, and California didn’t, it
couldn’t now obtain a duplicate recovery in the form of restitution of citizens
who were bound by the bargained-for restitution in the settlement. [This result puts a premium on the FTC monitoring settlements, which is arguably a good thing but may strain resources; since so much of the FTC’s recovery in recent
years has been restitution-based, the ability to cut that off at a
comparatively low price could be incredibly valuable.]

CAFA requires notice
of a proposed settlement to be served on the “appropriate” federal and state
officials—typically the USAG and “the person in the State who has the primary
regulatory or supervisory responsibility with respect to the defendant.” A
court can’t order final approval of a proposed settlement until 90 days after
the notification. The state isn’t
required to intervene, and it might not: “Aside from securing compensation for
citizens, state enforcement actions serve other interests such as protecting
citizens from future harm, and these interests might not be served by
intervention in ongoing settlement proceedings.”Being an objector could serve important
interests, but direct enforcement actions serve equally if not more important
public interests; CAFA doesn’t interfere with government’s power to bring
enforcement actions.Under California’s
UCL, a public prosecutor can seek civil penalties, permanent injunctive relief,
and restitution, but private individuals are limited to injunctive relief and
restitution. Private suits can’t substitute for public enforcement actions, “which
serve as a far greater deterrent and thus a greater protection.”

IntelliGender makes the IntelliGender Prediction Test that
promises “immediate gender results in the privacy and comfort of the home. In
minutes, the IntelliGender Gender Prediction Test indicates your gender result
based upon an easy to read color match.” IntelliGender settled a class action over its
advertising, with proper notice to state and federal officials, by agreeing to
pay $10.00 for each approved claim and to make a cy pres donation of $40,000
worth of product. In addition, it agreed to change its website’s advertising as
well as the Test’s product insert and box. Changes to the product website
included clarifying that the “Nobel Prize winning chemist [who] was added to
the research team,” was actually “a graduate student” who was merely “part of a
1996 Nobel Prize winning research team in chemistry.” To receive the $10.00, a
class member had to submit a valid claim form, requiring her to swear under
penalty of perjury that the Test result was inaccurate as to her child’s
gender.[Note: this settlement indicates
the compromise involved in settlement, perhaps too much here; those changes are
tiny, and requiring inaccuracy as to the child’s gender seems misguided when
flipping a coin would have been right roughly 50% of the time, thus
undercompensating class members who were fooled but got lucky.]

Subsequently, the San Diego City Attorney sued for
violations of the UCL and FAL (also alleged in the class action).IntelliGender removed and the case was
transferred to the judge who presided over the related class action.IntelliGender sought an injunction under the All
Writs Act and under principles of res judicata, but the district court refused,
reasoning, in part, that the State’s claim was brought in the State’s sovereign
capacity to protect its citizenry from unscrupulous business practices.

Federal courts can’t enjoin state court actions except under
a few circumstances, including where necessary “to protect or effectuate the
federal court’s judgments,” which reinforces res judicata and collateral
estoppel. “Res judicata applies when the earlier suit: (1) reached a final
judgment on the merits; (2) involved the same cause of action or claim; and (3)
involved identical parties or privies.” (The court of appeals noted that, because the
issue was not argued, the court was using federal law without resolving whether
the federal or state law of res judicata should apply.)

There was definitely a final judgment on the merits on the
same causes of action, the UCL and FAL.Privity was the key, and the Supreme Court has cautioned that “issuing
an injunction under the relitigation exception is resorting to heavy artillery.
For that reason, every benefit of the doubt goes toward the state court; an
injunction can issue only if preclusion is clear beyond peradventure.”

The court found that the district court correctly denied IntelliGender’s
motion to enjoin the State’s enforcement action in its entirety.No class action settlement could bind the
State in its sovereign capacity, where it asserted both public and private
interests.The fact that special
penalties were available to the State showed the separate public interest.The State’s failure to object to the
settlement was irrelevant; an official objection or its absence is relevant to
fairness, but CAFA specifically provides that the notification requirement does
not “impose any obligations, duties, or responsibilities upon, Federal or State
officials.” To count failure to object
as a reason to find res judicata would undermine the purpose of the statute.

But what about the State’s claims for restitution?Insofar as it sought restitution for
individual members of the settlement class, the action should have been
enjoined under the court’s continuing jurisdiction to enforce and administer
the settlement.Courts should preclude
double recovery by an individual, and when the government sues for the same
relief a plaintiff has already pursued then the requisite closeness of
interests for privity is present.The
individuals on whose behalf the State sought restitution were the same as the
certified class, and it didn’t matter that the amounts sought were
different.The district court had
reasoned that the class was limited to only those who bought the product and
got an inaccurate result, whereas the State was seeking restitution for all
purchasers—but that wasn’t true. It was just that only members who got an
inaccurate result (and applied) got paid.Members who didn’t get compensation are still bound by the settlement;
if the State wanted compensation for them, it should have intervened after
receiving notice.“This is the method
CAFA established for states to seek equitable compensation for class members.”Compensation was res judicata.The different amount sought didn’t matter,
and just confirmed that the State was seeking double “(or at least better)”
recovery.“[T]he appropriate inquiry is
not what relief was ultimately granted, but whether the government is suing for
the same relief already pursued by the plaintiff.”The district court abused its discretion in
not granting an injunction, given the harms of relitigation to the class action
system.Allowing extra claims for
restitution would decrease the incentive to settle and buy peace.

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